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For Sale: The Bay Area

Gold was discovered at Sutter’s Mill in Coloma in January of 1848. A few weeks later, Sam Brannan strode through Portsmouth Square shouting “Gold! Gold! Gold from the American River!” News reached New York in August and was confirmed by President James Polk in December. Only then did the true Gold Rush begin with the influx of arrivals in 1849, multiplying the population over 100 times in the next three years.

Brannan, a Mormon newspaper man in New York, left for San Francisco by sea as the rest of the Latter Day Saints went west overland after the death of Joseph Smith. The two things Brannan brought with him were a flour mill and a printing press, and after cornering the market for prospecting supplies and marking them up exorbitantly, proceeded to promote the placers with the zeal of an evangelist.

While a few miners did make fortunes, it was Brannan and his fellow merchants supplying them that accumulated most of the wealth. Gold was a necessary, but not sufficient, condition for a gold rush. You also need publicity and poverty, the former which Brannan was happy to provide while the latter is never in short supply.

Thanks to Silicon Valley, the printing press is now an anachronism best suited for producing twee, artisanal invitations for your wedding to a Facebook millionaire. But that’s only made publicity cheaper, and poverty is at levels not seen in this country since the 19th century. So while tens of thousands of people flood into the Bay Area seeking the fortunes described by true believers in the technology trade press, a new generation of hucksters have quietly arrived to peddle real estate to the masses huddled in startup houses, yearning for VC.

So who are these snake oil salesmen? And how are they using spectacle to encourage speculation?

In a bland, half-empty conference room at the Holiday Inn Golden Gateway on a chilly morning in San Francisco, a few dozen people had assembled to hear about how to take advantage of real estate investment opportunities from the latest star of A&E’s “Flip This House,” Nathaniel “Than” Merrill. (A&E has taken episodes of the series featuring flipper Sam Leccima off the air after Leccima wasaccused of fraud.) The network had been promoting the seminars on television and the web as “Than’s Event,” but Than couldn’t possibly have made it to dozens of events around the Bay Area, many of which were running concurrently. Instead, the event was hosted by Danny Allen, a charismatic showman with eight children, capped teeth, and some interesting views on monetary policy and international relations.

So the first business lesson of the day was “the bait-and-switch.”

This is not the first time Fortune Builders has put on this act—Richmond, Virginia’s NBC12 ran an investigation of the enterprise last year and reports that a Cleveland City Councilman declared it “a pyramid scheme” when the show visited his town. Think Carleton Sheets meets Landmark Forum. While early on Allen promised the crowd he wasn’t just trying to sell his customers education, like some of his competitors do, he proceeded to spend the next 90 minutes convincing everyone to take advantage of this unique opportunity pay the low, low price of $197 for two people to attend a three-day training event. A savings of $1,000 from the regular price!

Why would a successful real estate mogul be pitching discount tickets to a handful of A&E viewers? Because real estate investment is actually a difficult, risky, highly capital-intensive business with, in the aggregate, often pretty limited returns over time. Institutional investors made a killing by buying up foreclosures in 2008, but the pickings on the corpse of the last real estate bubble are only getting slimmer. Almost the only thing to recommend it to small-time investors is that it doesn’t necessarily require a specialized degree or even licensure, which is like offering someone who doesn’t know how to swim an opportunity to dive into a tub of sharks.

But leveraging cable network advertorial, booking a hotel conference room and wrangling some sales jocks also doesn’t require formal training, offers a low cost-of-entry and has significantly better return-on-investment potential. The audience, primarily people of color, can’t be blamed for looking for a way out of the cycle of stagnant wages and increasing housing costs. And Fortune Builders, along with A&E, aren’t the only people selling feverish dreams of real estate fortunes to the desperate.

If you want to watch the process of gentrification on the microscale, you can also tune in to HGTV’s Flip It to Win It on Tuesday nights and watch as flippers descend on (probably staged) foreclosure auctions looking for recently vacated homes to makeover. A combination of free market ideological propaganda and aspirational home remodeling porn, Flip It to Win It offers an outsider’s perspective on the macroscale trends in the Bay Area. Where locals might see an affordability crisis, HGTV declares that “In Northern California, there’s a new gold rush!”

Taking place primarily in Santa Clara County, but with forays into Alameda and San Mateo, five teams are followed as they commit criminal trespass to inspect homes before auction, actively reduce housing density by demolishing in-law units, and increase “curb appeal” long enough to push a home’s price ever further past what the former tenants couldn’t afford. What they aren’t doing is helping cities like San Jose achieve planning goals. What they are doing is pushing area home prices past 2007 peaks.

“I feel like I’m back in 2005. It almost feels like frenzy,” Flip It to Win It’s Beau Eckstein told the San Francisco Business Times. “I love it, but this time, I’m not going to get too carried away because what goes up must go down.” Please God, give Eckstein just one more bubble. He promises not to screw it up this time!

The only value truly added to the housing stock in the show is almost purely aesthetic—time and again the teams express that their biggest fear is buying a house at auction that might need actual structural improvements, which would cut into profit margins. In fact, the only lot shown to lose money this season was a building that needed repairs to faulty plumbing causing foundation problems which the flippers simply ignored in the superficial remodel and sold as-is.

If you can’t just take down some walls, install stainless steel appliances, roll out some sod and rent some furniture for temporary staging to sell the house for 10-100 percent more than you paid in less than five months, why bother? The real problem is that no matter how much lipstick you put on a pig, it won’t feed any more people at a barbecue. While flippers say they improve neighborhoods by removing blight, that’s at best a secondary consideration. More importantly, they are doing the work of putting loans back on the books of banks that only very recently wrote off many of the same assets before being bailed out.

According to Fortune Builders’ Danny Allen, he’s “no fan of the banks,” but he pointed out that millions lost their homes but still need places to live. The “way out” he offered was to flip enough homes to buy one outright and then rent that home. He admitted that this was a lot more difficult than it looks on television, but not as a way to discourage the financially insecure from the business, but to encourage them to sign up for more Fortune Builders instruction.

About half way through the next session of the morning, a group of five people arrived and began delivering fliers to the crowd. “This workshop directly encourages people to profit from evictions and rising housing prices fewer and fewer can afford,” it read.

It is true that in this economic climate well paid work is increasingly hard to find. The prospects of a virtually work free life by flipping properties has an appeal no one can deny. However, the reality is that this practice directly attacks the people who need the economic help the most.

The protesters, from Defend the Bay Area, didn’t stay long as Fortune Builders associates followed them to collect the fliers from attendees and Allen shrugged them off as “rude.”

Everybody has to make a living. Allen has eight mouths to feed! And the teams on Flip It to Win It are just hard working people who have to pay for their Paris wedding, move their husband and horse from Phoenix to the Bay Area and pay private school tuition for their children at Pepperdine like anyone else. Of course, it’s a lot easier to make a living when you have access to capital, and “asset-backed investment strategies” aside, it’s nearly impossible to make a living as a flipper without it.

And being elderly, disabled, a women or a person of color, like many in the audience on Friday, only compounds the structural disadvantage one has simply from being working class when it comes to getting commercial credit or attracting private investment. People who are already stressed financially by housing costs, like most Bay Area residents, are in the absolute worst position to take such risks. (Coincidentally, all of the representatives from Fortune Builders were white men, except for Allen’s wife. Then again, so were most of the protesters.)

Which may be why Allen promised during the earlier session that at the 3-day event, millionaires would be on hand just for the chance to meet enthusiastic asset management hopefuls and presumably fund their projects. If that doesn’t pan out, Fortune Builders would also be evaluating attendees for “partnership.” But he doesn’t want any skeptics! He frequently cajoled people into participating, giving sermons on positivity and actively asked the audience to suspend their critical thinking capacity. Which is the only way the pitch could make sense, since after declaring that America’s problem is how much debt we owe to China, he suggested that the audience leverage that very same Chinese money to make their own dreams come true.

And the cognitive dissonance didn’t end there! Things took an even more surreal turn later as Allen complained about Nixon’s decision to move off the gold standard to a fiat currency and declared that “China’s on a mission to de-Americanize the planet.”

“I’m collecting gold, buying up real estate,” he assured, standing in front of his laptop adorned with an American flag sticker in the shape of Africa. Fortune Builders and its real estate business, CT Homes, also does development work in Ghana! Just in case you were having trouble drawing the connection between gentrification and colonialism.

In both cases, the goal is to extract wealth from the community where it is produced for the sake of rentiers. But rentiers are people too! And shows like Flip This House and Flip It to Win It do their best to humanize the speculators and hide the violence of the process while promoting housing as an engine of private wealth creation, as opposed to a resource for public good. Old Brannan would be proud! But the whole business demands a certain sociopathic detachment, which is a skill that all the best charlatans have, but hopefully not one they can teach.

This flyer is scary! “Flip landlords, not houses.” I agree that real estate speculation hurts the city and understand the desire to protest a house-flipping workshop. But why demonize the landlord? I mean: if you want renters, you need landlords. There’s nothing intrinsicly wrong with landlords. Most SF landlords are mom-and-pop who put their savings in a second place to get extra income. People who buy a building to Ellis Act are NOT landlords. People who buy a building to flip it are NOT landlords. So why attack the landlords in the flyer? Renters want landlords to rent to them. They want kind, meek, accomodating landlords, but landlords nonetheless. So don’t go fighting landlords, go give them a hug. (Some landlords would try to evict their ow ailing grandmother: by all means, go after them.)

These guys came to Little Rock, Arkansas this week. I went to it today, and everything you just described is exactly what transpired today. Every single detail.

Allen stopped in the middle of it and said, “How many of you thought I was going to sell you something today?” We all raised our hands (lolz). After that, he presented the three-day event and then the “tuition” for the seminar.

Since it was free, I went to the thing with the expectation of receiving a sales pitch, so I was not surprised when Allen stopped his sermon to allow “those who were serious about flipping” to go to the back of the room and register for the event. What I was surprised about was his random political rants and declaration that Joel Osteen is his mentor. Where did that come from?

I attended the event because I figured there was no harm in getting somebody’s perspective on how to do something interesting. What I got was exactly what I expected: 80% sales pitch/self-promotion and 20% useful information.